Competition spurs Japannext to new heights

SBI Japannext chalked up record volumes for a proprietary trading system last month but fierce competition with Chi-X Japan, ongoing fragmentation of liquidity and more global players looking to trade Tokyo mean this is just the beginning, according to co-CEO Chuck Chon.

Having started life as an after hours trading platform launched by a consortium of Japanese online brokers, SBI Japannext chalked up record volumes for a proprietary trading system (PTS) last month in Tokyo. Fierce competition with Chi-X Japan, ongoing fragmentation of liquidity and more global players looking to trade Tokyo mean this is just the beginning, according to co-CEO Chuck Chon.

Between them, Japannext and Chi-X Japan are now accounting for around 6% of trading in equities listed on the Tokyo Stock Exchange (TSE), meaning the two rivals combined are now trading more equities volume than the Osaka Securities Exchange (OSE).

“Having a very competent and formidable competitor in Chi-X Japan really motivated all of our team. In response, we totally revamped our marketing, client onboarding and cost structure,” says Chon, pointing out that Japannext has halved its commission to 0.2 basis points.

In July, Japannext traded ¥536 billion (US$7 billion) according to its own figures. According to Thomson Reuters, Japannext had a 2.65% share of Nikkei 225, just ahead of Chi-X Japan, the PTS launched by market operator Chi-X Global twelve months ago, which had a market share of 2.55%. Total equity trading in Japan reached US$324.3 billion in July, its lowest level so far this year.

As well as the domestic online brokers which are investors in Japannext – SBI Securities, Rakuten, Orix, and Click Sec – there are a growing number of global brokers – Credit Suisse, Bank of America Merrill Lynch and Goldman Sachs – now connected to the venue as active members and shareholders. An additional eleven global brokers are active trading members: Barclays Capital, BNP Parbias, Citi, Deutsche Bank, Instinet, J.P. Morgan, Mizuho, Morgan Stanley, Newedge, Societe Generale and UBS.

“Our members in turn have invested considerable sums of money and resources to rollout smart order routers (SORs) and algo engines to efficiently access better liquidity provided by market makers who participate in our venue,” adds Chon.

SBI Securities – the biggest online broker in Japan with 2.3 million users and 7% of the TSE's volumes – brought out the first homegrown SOR technology on 27 June, which has further boosted the volumes on Japannext. “The other online retail brokers are now all talking about rolling out SOR tech to connect with us,” confirms Chon.

With a mix of retail flow from online brokers, prop traders, market makers, agency and buy-side orders, Japannext tries to balance liquidity from all the participating segments, according to Chon. Japannext currently covers 850 to 900 names, but plans to expand that to as many 1,500.

Liquidity fragmentation and competition having improved the trading landscape on a number of levels, says Chon, but he believes that the much-mooted TSE-OSE merger would be a step in the opposite direction.

“Rapid growth of Chi-X and Japannext market share is clear evidence that combining two incumbent gigantic liquidity pools do not make sense in promoting innovation in the Japanese market,” suggests Chon.

A proposed market reform that Japannext is more positive on is the extending of the TSE's opening hours. “Whenever TSE takes lunch break, our market participants take lunch break. Whenever TSE opens market, our participants' trade at our venue; we absolutely dependent on primary exchanges' opening hours,” says Chon. “Make no mistake, we do not exist to replace TSE and OSE, we exist because of TSE.”

An extension of TSE trading hours, originally intended for May this year, is now scheduled for 21 November. The TSE plans to shorten its 90-minute lunch break to one hour – 11.30-12.30 – a measure that TSE president Atsushi Saito previously predicted would increase trading by around 6%.

Chon is also hopeful that an end to the 5% TOB (tender offer bid) rule and a ban on margin trading on PTSs are on their way. The former “will trigger conservative buy-side participants to start accessing PTS venues”, while the latter “will trigger even more dramatic retail flows to Japannext”, he believes.

“With each passing day, we are getting more bullish about further growth of PTS venues and our role in growing the size of the overall pie,” he says. “Sure, TSE and OSE market share may go down in percentage terms, as happened in the US, but the overall size of the pie will grow proportionately, so that net effective turnover volume for TSE and OSE will actually increase proportionately.”

Japannext is targeting 5% market share by September/October and 10% by mid 2012.

“Japannext's market share one year ago was 0.24% of the TSE. We recently recorded a peak market share of 2.9% of TSE's turnover during the record trading days for TSE and other venues,” he points out. “So turnover has grown over 10 fold in one year.”